Beyond the Carrot and the Stick: New Alternatives for Influencing Customer Behavior

Special offers, service fees, financing deals—these are all examples of how companies try to influence their customers’ behavior from time to time. Historically, the two basic tools for doing this have been the carrot and the stick. But some companies are having success with a third strategy.

So-called normative approaches make use of peer pressure and other social controls—some of the oldest techniques around. They establish credibility by tapping into the collective power of a larger group. In the right circumstances they can produce remarkable results.

Understanding the choices: instrumental versus normative controls

Carrots and sticks are known more formally as “instrumental” controls. A specific reward or punishment is applied to induce the desired behavior. For example, if you keep a minimum balance, your local bank may waive its normal fees. The bank offers you this carrot because it benefits by using your balance to cover the cost of servicing your account. At the same time, the bank may charge a fee for each out-of-network ATM transaction. Since the bank incurs costs for each of these transactions, it uses the stick of a fee both to discourage such transactions and to help cover its costs if they are made.

But JetBlue (Salt Lake City), the upstart low-cost airline, took a normative rather than an instrumental approach when it realized that it needed to turn its planes around at the gate quickly in order to achieve the efficiency required for profitability.

Cabin cleaning is a key element in the turnaround process. JetBlue knew that its customers were generally enthusiastic about the airline, so it asked each customer to clean up her area before leaving the aircraft. There were neither frequent-flier mileage bonuses for a clean row nor fines for crumbs on the floor—JetBlue simply told customers that they could help keep fares low if they would pitch in.

Customers responded positively— even those who might not have been eager to help didn’t want to stick out as shirkers. The company has been able to keep its costs low and is profitable at a time when many airlines are struggling to stay aloft.

Tapping into community

Successful normative controls gain credibility from the collective norms of a larger group. They reinforce that credibility by building on the group’s ongoing experiences. Several decades ago, when most businessmen wore hats as a matter of course, it was considered impolite not to remove your hat upon coming indoors. This wasn’t a law, it was just a social norm: Taking off your hat was simply the proper thing to do. Compliance was widespread, even though the only enforcement tool was the scorn of others in the social group.

We are much less prone to such broad social controls today (note the number of hats being worn indoors), but in specific circumstances they can be as powerful as ever.

Now, however, we need a more explicit explanation of the reasons for compliance and the benefits of doing so. We also need to be part of a group that is willing to undertake enforcement of the norm.

To see how normative controls work, look at Shouldice Hospital in Toronto, which performs only hernia operations. Shouldice has a much higher success rate and is more profitable than other institutions that perform the same operation.

Part of the hospital’s success can be tied to its particular medical practices: The facility is designed specifically for hernia patients, and it admits only patients who, aside from their hernia problems, are otherwise healthy. But that isn’t the whole story.

At Shouldice, there is an understanding not only that the surgery is only one part of the process, but also that its success can be dramatically affected by what happens immediately before and after the surgery. Shouldice relies on its patient community—that is, its customers.

For example, each patient is expected to be a “hernia mentor” to other patients. Patients conduct the hospital’s orientation sessions. They help one another with follow-up care after the surgery. And the facility sponsors reunions among former patients.

Such practices turn patients into a trusted peer group that helps new arrivals understand what they need to do to improve their procedures’ chances of success. By mobilizing the social power of this patient community, Shouldice has increased compliance with best practices and has dramatically improved the overall success rates of hernia procedures.

Using normative controls to improve quality

EBay, the online auction site, faced a quality control predicament as it began to grow. Although its technology was capable of linking large numbers of buyers and sellers around the world, eBay’s future growth could be threatened if customers found the experience unsatisfactory. There was no way that eBay itself could police the hundreds of thousands of transactions conducted on the site without hindering the rapid flow of information that characterizes the auction environment.

How, then, to ensure an environment in which people would feel secure transacting business?

The solution was to let the buyers rate the sellers and post that information on the site. The online community could set and enforce its own norms through the rating process. Sellers gained greater confidence because they could rely on the experience of a broad range of their peers.

Meanwhile, buyers learned that there would be consequences for disappointing sellers. Thanks to this low-cost policing mechanism, the standards on eBay have become so high that some companies have found that they have to provide a higher level of customer service through their online channel than they do to their offline customers.

Zipcar serves as another example of the effectiveness of normative controls. This Cambridge, Mass.-based company provides urban dwellers with access to private vehicles for periods as short as an hour or two through a fleet of vehicles shared by all members. The customer reserves a specific vehicle parked at a specific location in the city. (There are no central lots like those used by traditional rental car companies.)

Zipcar not only asks its customers to return the vehicle on time, it also requests that they not smoke or bring pets in the car and that they leave the vehicle clean and with a full tank of gas. No Zipcar employee monitors each customer’s use; in effect, the company relies on its customers to satisfy one another. In fact, according to one Zipcar official, “the vast majority— 95% or more” of customers— understand the benefits of compliance and do so willingly.

Zipcar also engages in extensive community-building activities—from sending humorous newsletters to organizing its customers to make charitable food deliveries at the holidays— that help deepen the feelings of interdependence among customers. Given that 20% to 25% of the company’s growth comes from customer referrals, the strategy seems to be working.

Even so, normative controls alone don’t always work. Zipcar has instituted a late fee—to date, fewer than 5% of customers have had to pay one—and is considering raising it substantially for repeat offenders. A Zipcar spokesperson says, “No one thing works for everyone. For some people, a fine is a necessary enforcement tool.”

When do normative controls work best?

Based on these company examples, we can make a few inferences about the conditions under which normative controls are most effective.

1. Customers are looking to do things differently. Each of the companies we have discussed here has an offering that appeals to customers looking for an alternative to more traditional-minded competitors. These customers may be more responsive to normative pressure if they feel it increases the new alternative’s chances of success. The company’s success reinforces the wisdom of the customer’s choice, so the customer is willing to help the company.

2. There is a community of interdependent customers. Socially reinforced behaviors require some sort of connection between the individuals affected. At JetBlue, the connection is physical—customers sit next to each other on the plane. At eBay, the connection is virtual. In both cases, however, customers can see the consequences of complying with or ignoring the desired norms—and they feel a natural inclination to act in ways that will garner the approval of their peers.

3. There is a high degree of trust between the company and the customer. If Shouldice Hospital showed its patients a movie with actors demonstrating the right things to do after a hernia operation, there would be less credibility than there is when actual patients—peers with no possible ulterior motives—are the medium for transferring this knowledge.

Frances Frei is an assistant professor in the Technology and Operations Management (TOM) unit of Harvard Business School.

This article appeared in the March 2003 issue of Harvard Management Update.